Move over Slagadappyboob, Bob Diamond & Co are in the house!

scose-no-doubt

Veteren member
4,630 954
Snake in a can housing loan products peddled to big/real money over steak; fudging books for entire countries leading to an eventual mass insolvency of governments; whoopee cushion hedge funds investments; rabbit in the hat client deposits. The financial industry has helped provide us with much in the way of lulz over the past decade. While this has all lead to tragedy and despair for a great many, the show must go on as they say. As a practising lulzer, I like to live my life on the understanding that it's better to laugh than cry and as such, we move on to the latest round of F-In lulz surrounding libor and "I-neva-sid-nuthin'" consortium headed by Timmy "The Man" Geithner and Merv "Tight Lips" King.

Here to offer an insider's musings and answer as many questions as he can be bothered to I present Dr Martin Ghoul Esq.

Let the lulz commence.
 
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scose-no-doubt

Veteren member
4,630 954
Mr Ghoul, what are your musings on the recent libor lulz and did you have an inkling there was something fishy going on during? As an industry insider do you think that this inquest going to spur any real changes?
Oh god, there is soooooo much written on the subject, I hesitate to add anything to the noise. As a market participant, I have some thoughts on all these LIBOR shenanigans that are based on (occasionally painful) personal experience (no, I don't mean prison, as I have never been that close to the action).

One outcome that is pretty certain to me is that it's going to be an almighty lawsuit with a potentially massive settlement that the banks are likely going to have to agree to. At any rate, I would be happy to give you more detailed thoughts, but maybe this is the right thread for it.
:love:
 

Martinghoul

Senior member
2,690 276
Hahahaha, I don't think I can live up to such high expectations... I am experiencing stage fright and all.
 

scose-no-doubt

Veteren member
4,630 954
Okay then I'll bring it down to my normal level of epic ignorance.

libor wtf? what actually happened? wtf is doing on? give me lulz!

Edit: If Peston can do it, I have every confidence in you, Mr Ghoul.
 
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Martinghoul

Senior member
2,690 276
Right, so here's my Z$2c...

Firstly, it's important to note that everyone in the mkt has always known about LIBOR being manipulated. Periodically, various people (including yours truly) have undertaken efforts to discuss the various glaringly obvious flaws of the fixing process with the BBA (the agency that is responsible for defining and publishing the rates). I personally had a discussion with the gentleman in charge of LIBOR at the BBA in late 2007. The BBA's response had always been "it's not our business to interfere in the market-driven process that determines LIBOR". Needless to say, that's idiotic (which I pointed out to them back then) and it's now come back to haunt them. To summarize, the main issues with LIBOR are twofold: a) it's a rate that is structurally easier to manipulate than other mkt rates; b) it's the most commonly used reference rate in the world of interest rate derivatives. Needless to say, a) and b) together create an explosive combination.

Now on the subject of actual manipulation. It's generally important to distinguish between the two very distinct types of "manipulation" that the Barclays settlement has brought to light.

The first type, while being the more headline-worthy one, is actually materially not very significant. I am referring to the whole "Big boy, I set LIBOR 1 basis point lower for you for a bottle of Bollinger" borrox that has gone on during the pre-2008 crisis period. Yes, it has always gone on; yes, it's bad, as it's not only market manipulation, but also is a symptom of collusion among the banking cartel. However, on the flip side, a) this is truly a zero-sum game, as it's just Bank A competing to take a basis point from Bank B; b) a basis point on a fixing is really irrelevant in a grand scheme of things, even for the derivatives mkt that is measured in trillions of gross notional. Regardless of material impact, I imagine this is the sort of thing where the FSA (and others) can actually bring criminal charges against specific traders.

The other type of manipulation that Barclays have effectively admitted to is the "head above the parapet" type of lowballing of LIBOR that occurred systemically during the crisis, i.e. late 2007, 2008 etc. Now, ironically, Barclays in this case actually tried to do the right thing, i.e. their LIBOR submissions were right and they made numerous attempts to notify both the FSA and the BBA that the other banks were lowballing. However, that proved to be a threat to their survival and the authorities started to get involved (whether Diamond actually got the nod from Tucker or not remains to be seen), which forced Barclays to re-join the pack. The process of parceling out blame is starting now, with all the hearings, investigations and the like. I don't know how it all actually ends, but it's likely to be very messy and going to tarnish a lot of names. One thing for sure, the actual impact of the banks collectively lowballing LIBOR is very significant. My estimate is that we're talking about tens of billions of dollars and the lawsuits are already making their ways through the courts (including the large class action suit in NY).

So that's about it. There's a lot of sturm und drang and, if I had to guess, this is only the beginning.
 

scose-no-doubt

Veteren member
4,630 954
So does this mean a more transparent/audited libor in future? Will this be significantly higher than what we're used to seeing and what effect is this likely to have on the derivatives market?
 

Martinghoul

Senior member
2,690 276
So does this mean a more transparent/audited libor in future? Will this be significantly higher than what we're used to seeing and what effect is this likely to have on the derivatives market?
It certainly means that there will be changes to the way LIBOR is set. No question about that. However, there's a lot of possible ways LIBOR can be reformed, so it's not clear as yet how it's going to happen. I think the most natural way is to replace LIBOR with an actual transaction-based rate. For example, there's GC and OIS rates that are definitely viable alternatives. Obviously, in case you replace LIBOR w/some other rate, you need to decide what to do with the existing LIBOR derivatives. And there's a lot of those out there. So, actually, it might be easier to come up with a way to fix the existing LIBOR process by somehow making it more transparent and there are ways to do that, which have been discussed.

Is the new rate going to be significantly higher? Don't think it's necessarily the case. Marginally higher, if anything, but that's just my personal opinion. As to the impact on the derivatives mkt, it's really hard to say, as it depends on a whole lot of different factors.
 

eighteen

Active member
187 23
If you look at barclays libor submissions most of the time they were rejected for being too high, then when the "manipulation started" they were usually thrown out of the count for being too low, the most they ever effected libor by was very small, other bank's had been doing it alot longer, i think theirs only like 29 occaisions were barclays actually got in with a lower count, think its more Citi ubs and RBS that might be in big trouble from this
 

Martinghoul

Senior member
2,690 276
If you look at barclays libor submissions most of the time they were rejected for being too high, then when the "manipulation started" they were usually thrown out of the count for being too low, the most they ever effected libor by was very small, other bank's had been doing it alot longer, i think theirs only like 29 occaisions were barclays actually got in with a lower count, think its more Citi ubs and RBS that might be in big trouble from this
It actually doesn't matter whether Barclays contribution was discarded or not. Not to a US court, which is dealing this as a violation of the Sherman Antitrust Act. It's about the liability of the whole industry.
 

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